Scoping legal services

EDITOR’S NOTE: Abridged with permission from Buying Legal Council’s The Definitive Guide to Buying Legal Services

Scoping is that portion of a Request for Proposals (RFP) or of an Invitation for Strategic Partnering (ISP) designed to inform law firms of the scope of work (SoW) in a way that can achieve a company’s objectives. This is particularly important when covering portfolios of work or multiple jurisdictions over time.

Historical Data:

The past is not a predictor of the future when it comes to expressing the demand for legal services. However, historical data is the first place to start. A matter management system is a superior source of data when compared to accounting data. Still, companies that maintain a matter management system may find that some legal activity is not captured because it is a pass-through charged to customers, to insurers, to special projects or is cost-shared with other companies in the same industry.

Experience shows that asking each law firm that has been paid more than a certain threshold (e.g. $10,000) in one of the last two years, to produce data in a uniform format will generate a more comprehensive picture of the company’s historical demand for legal services. A basic spreadsheet supported by clear definitions of each legal category is sufficient to secure what is needed from firms. Ensure that the spreadsheet covers at least two complete calendar years plus as many months as possible in the current year. Data is required for each legal specialty and should be broken down according to jurisdiction or region, by legal specialty and matter complexity, and with the total hours per year for each. In turn, the annual hours should be available by experience level for lawyers and technical staff to map practice patterns and staffing ratios for each law firm and legal specialty.

Provided the data sourced internally and from law firms is comprehensive, then it is straightforward to determine the volume of activity (hours, number of matters), total fees and effective rate, as well as the staffing patterns for each legal specialty for each law firm by jurisdiction, and for the company and its subsidiaries for each year covered by the RFI.

As part of a supporting document, law firms should describe discount and favorable fee arrangements that were applied to the spreadsheet data. For companies that retain dozens, not to mention hundreds, of primary and secondary firms across multiple jurisdictions, asking the firms to provide pricing information is more efficient than sourcing fee arrangements internally. Apart from rates, internal data may not be current or well-documented.

The analysis of the RFI data and discount arrangements should be prepared by procurement and discussed with the law department. Experience shows that companies are seldom aware of the extent and detail of their company’s external legal activity, including:

• the precise number of primary and secondary firms used across the company each year
• fees, not including disbursements and taxes, paid to each firm by jurisdiction and legal specialty
• the number of matters and hours for each firm, again by specialty and jurisdiction
• variations in effective rates, discount arrangements, and alternative fee arrangements for similar work
• variations in practice patterns and staffing ratios by law firm for similar work

A comprehensive review and discussion with the law department should generate clearer objectives for the RFP / ISP including

• the preferred number of primary and secondary firms for the future
• preferred practice patterns and staffing ratios by legal specialty
• opportunities for non-hourly fee arrangements and for more favorable financial terms
• how best to formalize and improve internal protocols and operating practices governing how legal work is assigned and how it is managed with law firms
• how the law department and law firms can introduce and manage detailed matter budgets for all files over a minimum threshold (e.g. 50 hours)

Forecasting the Demand:

Companies balk at divulging projected volumes / hours of work for each legal specialty and jurisdiction in their RFP / ISP. There will always be concerns that doing so can be interpreted as a company guarantee or commitment that the work (hours) will be there. For this reason, it is a common practice for the procurement process to be limited to creating a panel of qualified firms with the best possible hourly discount. Regrettably, this approach fails to leverage the data to stimulate non-hourly pricing, innovation, and efficiency from the law firms selected. It also fails to support many of the non-financial objectives. In short, the company is not using its buying power to maximum advantage.

Determining the scope of work for purposes of the RFP / ISP should be a joint process between procurement and the law department. Consider a SoW that covers at least three years. Express the demand for each specialty and jurisdiction as the total hours per year. Projections should be adjusted up or down from historical patterns, based on the law department’s knowledge of work that is recurrent and work such as litigation, regulatory matters and transactions which can be irregular in its timing. Volumes can vary for each calendar year. The text of the RFP / ISP should explain the type and configuration of the legal work in the SoW.

Significant migration towards non-hourly pricing in favor of alternative fee arrangements (AFAs) which stimulate efficiency in law firms should diminish the number of hours required by the firm to do some of the work. The introduction of rigorous matter budgeting for files exceeding the defined threshold will also reduce the number of hours used. Companies have been successful in reducing the SoW (hours) by up to 15 % with the combined use of AFAs and legal matter budgets.

There are important strategic and practical considerations when preparing the SoW for the RFP / ISP. The first is strategic because it addresses a non-financial objective of possibly changing the number and configuration of primary firms. Creating a critical mass of work that is sustainable for firms over the RFP / ISP reference period means reducing the number of firms invited for proposals.  A smaller number of law firms should be kept in mind for maximum leverage. Consider that 10,000 hours per year represents a full workload for only 5.5 lawyers and paralegals.

A three-year projection in the SoW is always an estimate at best. There will be fluctuations in volume by jurisdiction and specialty from year to year. Favorable fee arrangements, even hourly arrangements, will be influenced by the amount of work the law firm hopes to receive. The RFP / ISP should state that the terms of engagement with each primary law firm will contain an annual review and adjustment mechanism which is both retrospective and prospective. Such reviews will consider variations from the anticipated scope of work and the potential for adjustments to fee arrangements.

Many law firms have at least 10 years and some have 20 years of experience with formal sourcing of legal counsel. Many legacy firms will be successful in remaining on panels and will not be at risk of losing legal work on active matters. Leading practices suggest that legacy work should be included in the SoW for the RFP / ISP, even if the same firms continue the work. Legal matter budgeting and optimal staffing ratios will usually be accepted by legacy firms as part of a concerted cost management program.

The composition of law firm panels can change for many reasons. Lead partners leave the firm, or the law department changes its preferences, and because some legacy firms emerge from the sourcing process as comparatively too expensive. The SoW for the first year following a multi-year sourcing process should allow for a transitional period to the new panel configuration.

RFPs and ISPs should seek to reduce panel sizes, prescribe optimal staffing ratios by specialty, and target a reduction from current pricing. Once sourcing is complete, incorporate an annual review and adjustment mechanism. Allow for the work of legacy firms and provide for a transitional process when changing the configuration of firms or introducing new pricing arrangements.